The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Opinion

Banking: Europe’s credibility under stress

After omitting an outright sovereign default from its latest banking system stress test, the EBA must set a high capital ratio for banks to pass, or risk losing all credibility.

As Euromoney went to press at the end of March, Portugal appeared to be on the brink of seeking assistance from the EU and IMF to roll over its finances, peripheral sovereign spreads were widening once more, and Ireland was due to present plans to recapitalize its banks that might require senior unguaranteed bondholders to share the burden. And the European Central Bank had managed to convince the markets that it would raise rates in April, as the consensus grows among credit analysts that default rates might have hit a cyclical low and be set to rise before too long.

So it’s a good time to be doing a banking system stress test, as long as it’s a credible one.

Financial markets in Europe have behaved with almost remarkable calm in the light of the continuing and interlinked stresses between sovereign debtors and banks. The contingent liabilities of thinly capitalized and precariously funded banks weigh on the sovereigns; the prospect of losses on holdings of government bonds weigh on the banks.

Sovereign and bank fortunes are intertwined as Deutsche Bank analysts illustrate in their report Looking for credible stress tests by tracing the historical relationship between five-year credit default swap premia for the country’s six biggest banks and five-year Spanish sovereign spreads and yields to Bunds.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree